Cross Listing in GCC & US Market - Book Report/Review Example

Cross Listing in GCC and U.S Markets Introduction Cross listing is when a company lists its equity shares in another foreign exchange to add to its domestic exchange. Both the papers discussed below talk about the significance of cross listing to shareholders. The first paper describes the significance of cross-listing making reference to the Gulf Cooperation Council (GCC) countries. The other paper describes the significance refers to Canadian firms (Coffee, 2002). Q 1). The research questions that belong to the team that has been discussed in both of the papers include; Paper 1, Does cross- listing benefits Shareholders? What is the evidence from Companies in the Gulf Cooperation Council (GCC) Countries? The aims of research questions are to investigate whether the cross listing of the GCC countries led to the minimization in the volatility of stocks that are cross-listed. Also, if it has improved liquidity and if there is a better valuation or return of the cross-listed companies. The other goal of these research questions is to determine if foreign listing of markets results to; reduction of risk, big returns and increased liquidity for companies that are cross-listed. Paper 2, the other research question is what are the long-term effects of Cross- listing, Ownership structure on Valuation and Recognition of Investors? The main goal of this research question is to show the long-term effects of Investor Recognition and bonding linked with United States cross listing in relation to valuations. The research can be done using various Canadian firms (Coffee, 2002). Q 2). Both papers outline the investor awareness assumptions underlying the research, but only the market segmentation hypothesis is in the first paper. Firstly, there is the Investors’ awareness hypothesis. According to Merton, cross listing assists investors to learn more about a company by minimizing information asymmetry. It also makes stocks easily available to many shareholders thus improving the liquidity of the stock. It also helps companies to reduce the cost of capital. According to investors, cross listing brings more investment opportunities to foreign investors and better diversification of risk. The other aspect is the bonding hypothesis. According to Coffee & Slutz, cross-listing in a foreign market that has strict barriers to entry, in terms of protection of shareholders rights and requirements of disclosure may reduce asymmetry of information. In reducing information asymmetry, it will lead to conveying of positive information about the value of the firm. It will also reduce Agency costs due to the disciplinary actions that cross listing would have on the behavior of managers. The other aspect is the market segmentation hypothesis which is in the first paper. According to Coffee & Slutz, the benefits of cross listing vary according to destination markets. For instance, European countries that cross-list their stocks in the U.S exchanges have rapid expansions and have recently privatized. On the other hand, those that cross-list in Europe have improved their advantage and had a high return on assets (Coffee, 2002). Both papers have made use of tables and charts to demonstrate the importance of cross listing. For instance the first paper table 2 (Market capitalization within the GCC countries). The table indicates the increase of the price to earnings ratio due to better economic outlook for Dubai, Kuwait and Saudi market. The increase is due to cross-listing. The chart in figure one and 2 (Days relative to cross listing) indicate cumulative abnormal returns of GCC countries after cross listing. Table 4 in the second paper (Time series impact of investor recognition) indicates the impact of cross listing on Tobin’s q over time. The table consists of Canadian cross-listed and non-cross-listed firms. More benefits are witnessed on the cross-listed firms. The two charts (panel A & B) indicate the number of U.S investors and a percentage of their holdings respectively. The two charts show the positive change of investor holdings and benefits due to cross-listing (Coffee, 2002). Q 3) The key findings in the first paper can be in simpler terms. The paper shows that cross listing leads to significant abnormal returns, a decrease in risk and improves liquidity. The risk is measured using standard deviation of returns or the average value at risk of the 5% level of confidence. It can also be determined using the average of the beta of cross-listed firms where there will be a reduction in risk. The other findings, referring to earlier studies by Coffee, the benefits of cross listing are different depending on the market destination. For example in London, listing leads to a reduction in risk and improvement in the stocks liquidity. It also leads to the same benefits in Bahrain. The findings in the second paper also show that the impact of the increase in valuation at the cross-listing time determines the expanding of the company’s U.S shareholder base. It shows that companies that do not attract investors do not experience valuation increase and are not different from non-listed firms. The other finding is that there is a permanent increased valuation with cross listing for firms that have a big U.S shareholder base. Finally, the paper also indicates that bonding and investor recognition have separate effects. It shows that firms in Canada that use dual-class shares are indeed valued at a discount, thus showing acute agency conflicts between controlling and minority shareholders. On the contrary, cross-listed firms which make use of the dual-class shares indicate a permanent increase in valuation of the U.S investor holdings. Therefore reducing risk of undermining minority shareholders and monitoring the controlling shareholders is the main answer to increased valuation for the cross-listed dual-class firms (Coffee, 2002). Q 4). The two papers are connected in a manner that both of them put emphasis on the benefits of cross-listing to shareholders. The benefits include increased liquidity, low cost of capital decrease in risk and higher valuations. They are since both papers share two assumptions; the investor awareness hypothesis and the bonding hypothesis. They are in that they both show the importance of companies attracting investors by cross listing in foreign markets. However, the two papers are disconnected in some way. The first paper talks about the market segmentation hypothesis which is not in the second paper. In addition, the first paper majorly emphasizes the benefits of cross listing to shareholders giving evidence of the Gulf Cooperation Council countries. On the other hand, the second paper emphasizes majorly on the effects of investor recognition, ownership structure on valuation and cross-listing giving an example of Canadian firms (Coffee, 2002). Q 5). As the decision maker of UAE, the following measures need to be put in place; according to the first paper, the best approach is to ensure the cross-listing of UAE companies. Such cross listing may help these firms to improve liquidity, reduce risk, and have abnormal returns. In addition, cross listing will also be better in a different market destination like in the United States or Europe as compared to doing it only with countries in the same region. According to the second paper as the decision maker, it is important to bring decisions that increase investor recognition. Companies that do not attract investors do not experience increase in valuation. The is need to emerge with the policies that minimize the risk of undermining shareholders and monitoring controlling shareholders. In applying the findings of the two papers, companies in the UAE will experience many benefits (Coffee, 2002). Q 6) From the findings of the two papers there are certain similarities with the International Finance textbook. The two papers show the benefit of cross listing to shareholders in terms of improved liquidity, reduced risk, abnormal returns, and reduced cost of capital and solving the agency problem. In both the textbook and the two papers, it is that cross listing reduces asymmetry of information thus leading to positive conveying of information about the value of firms. They also indicate the reduction of agency costs by the disciplinary action taken by cross listing on the behavior of managers. The other similarity is the issue of cross-border –listing on different market destinations so that benefits can be multiplied compared to cross listing in the same region. However, the issue of different market destination is only seen in the textbook and the first paper but not in the second paper. The aspect is that both the papers and a textbook. They are since they have similar underlying assumptions which are; the investor awareness hypothesis, the bonding hypothesis and the market segmentation hypothesis. However, the disconnection is seen where the market segmentation is not in the second paper. The other dissimilarity is that the International Finance textbook gives additional information on the Capital Assets pricing of under cross listing. The two papers only show the importance of cross listing and how to increase the valuation, but they have not shown how the pricing of assets is. The textbook has also explained the importance of Mergers and acquisitions in addition to cross-border listing that has not been explained in the two papers (Eun, Resnick, & Sabherwal, 2012). Conclusion Based on both papers, Cross-listing poses many benefits to co- operations and shareholders at large. The benefits include but not limited to; increased, low cost of capital, and increased valuations. Therefore, it is advisable for organizations to cross-list their equity share to take advantage of these benefits (Eun, Resnick, & Sabherwal, 2012). References Eun, C. Resnick, B. & Sabherwal. (2012). International Finance. Coffee, J. (2002). Racing over the top? The impact of cross-listing and stock market competition on international corporate governance. Columbia Law Review, 102, 1757–1831. Read More